Jeffrey Henderson, Chief Financial Officer, Cardinal Health

     Jeffrey Henderson, CFO, Cardinal Health Inc.: It's an honor to be here this morning, and I want to start off by congratulating the winners of the Alexander Hamilton Awards. Actually, many years back in my career, when I was at Eli Lilly, we had the honor of receiving such an award so I know it's a very important and well deserved honor.

     I'm going to speak about a relatively uncomplicated and non-contentious issue today -– health care reform. It may not be the most obvious topic for a Treasury & Risk best practices conference, but I think we'd all agree there may be no single issue that's going to have more of an impact on our personal lives and our professional lives over the next 20 or 30 years than what comes out of the debate in Washington over the next couple of months and quarters. It's a subject that’s critical to our country’s economic future and our national conscience.

     In the interest of full disclosure I am not a policy expert and we all know the debate on the Hill and Main Street continues and is very fluid. I'm sure everything I say today will be irrelevant by this afternoon. So I provide my comments this morning with some risk, but I know all of you are very familiar with taking risks and managing risks so this is probably the right environment to do it. As an author by the name of H. Jackson Brown Jr. once said, “Don't be afraid to go out on a limb. It's where the fruit is.” I think that's true for everything we do and particularly when it comes to health care. I would say without a doubt that if our country does not go out on a limb, within the next couple of quarters in our debates the ramifications of that are going to be felt for many generations to come.

     I should also disclose, and Donna [Donna Miskin, editor in chief, Treasury & Risk magazine] referenced this a little bit in her introductory remarks of me, that I'm tainted by the fact that I haven't lived my whole life in America. I was born and raised in Canada. I had my first child in Singapore and I had my second child in England. So I know a little from personal experience about health care systems in other countries. It's not to say that I am standing up here to espouse any of them, and I'll come back to that subject later, but I think it is important to have that perspective of how other countries’ systems work.

     In that regard, there's a great book out now published a couple of months ago by a gentleman named T.R. Reid who works at The Washington Post. It's called The Healing of America. You could choose to agree or disagree with his hypothesis and conclusions from the book, but if you are interested in learning more about health care systems in other countries, from a somewhat unvarnished view, again, as someone who has worked and lived in many of those countries, I would say it's a fairly accurate description of what health care is like in places like England and Canada and Switzerland and other countries of the world. So I would highly recommend it.

     So with that, here I go. My comments, offered by my experience primarily in the health care industry, are framed by three issues. The first is health care spending, and I'm sure this is a topic that's very familiar to all of you. The current rate of health care spending in this country is clearly unsustainable. According to the centers for Medicare and Medicaid services, per capita health care spending in 1970 was about $300. Now think about that, $300. Based on current projections, that number could exceed $12,000 by 2016, or $3.6 trillion, well beyond future projections for the GDP of many western European countries. Forty percent of the U.S. budget is consumed by health care.

2009 AHA Keynote Address

     Second, there are between 40 million and 50 million Americans who have little or no health insurance, a fact that seems hard to defend in a country of our wealth and power. So we face a dual problem, providing every American with health care coverage, and finding a way to pay for it.

      The third issue relates to the quality of health care –- of our health care system or maybe more appropriately the quality of our health. Many believe we already have the best health care system in the world. Patients from all over the world come to the United States to our hospitals to be treated by our talented health-care professionals. Further, there is considerable evidence that the United States contributes more to medical innovation than any other country in the world.

     Yet others point out, probably correctly, that our system is more about sick care, not health care. And in fact, this is more than just about semantics or word choice. When you read virtually every major media story or discussion, it's about health care. It's about improving health care in our country. Do you ever think that maybe the real discussion is about improving the health of our people? Not the health care?     I'm going to quote articles throughout my presentation, or suggest readings, and you're welcome to take me up on it or not. But I tend to do a fair amount of reading, particularly in the health care area, and I've identified a number of articles. Again, I don't necessarily espouse or agree with them, but they definitely open up my mind in terms of thinking about health care and the options that are available to us.

     On the subject of health care versus health, there is a great article in the September 2009 Atlantic Monthly by a gentleman by the name of David Goldhill, and the name of the article is “How American Health Care Killed My Father.” So somewhat of an emotional context to the article, but again, it provides some very interesting observations and suggestions for the future.

     Whatever lens you use to assess health care in this country, it could pretty easily be argued that we don't have the best health. According to The World Factbook, the U.S. ranks 50th in life expectancy. We rank 22nd in infant mortality. We have the highest obesity rate among member countries in the Organization for Economic Cooperation and Development, with by far the highest health care spending per capita and of the percentage of GDP.

     So the debate really boils down to three issues: cost, access, and quality. Like I said, simple But, health care reform is an incredibly complicated issue, as you all know. It's a Gordian knot that is wrought with strong, strong emotions. It touches us broadly and deeply. It is a very personal issue for us all. We are talking about the health of our nation, our communities, our families and ourselves. And, of course, for many companies like Cardinal Health, the future of our businesses.

     In spite of the theatrics and political posturing that are going on virtually every minute in Washington and throughout the country, I still believe the debate in Washington is at its core about a very noble cause. As President Obama stated in his address to a joint session of Congress in September, “The intent is to provide security and stability to those who currently have health insurance, coverage to those that don't, and at a lower cost to our families, our businesses and government.” It's kind of hard to argue with that, actually.

     In that same address, President Obama also noted that he suffers no illusions that this will be an easy process. That may be the understatement of the century. The need to improve the affordability, the access and the quality of our health care system is abundantly clear. It's important to our future as an industry, as employees, as individuals and as a nation. Any topic that touches that many people with such personal ramifications and affects such a huge part of our economy will never be simple to solve.

     Before I take advantage of this privilege to go on to share some of my thoughts or suggestions about health care, let me tell you a little bit about Cardinal Health so you understand our role in the health care system. Now, I often joke to people that we may be the most unknown Fortune 20 company in the entire business world, and part of the reason that we are unknown is we work a little bit behind the scenes in health care. You, very often, won't see our products on retail shelves with our name on it. Very often you'll see our products when you are in the hospital. As a matter of fact, when I'm in the hospital I always take a little bit of pleasure identifying how many of our products are actually sitting around the operating rooms and clinician's rooms.

2009 AHA Keynote Address

     But let me tell you a little bit about us. We've changed a lot in the last month or so. We've actually just completed a very significant spinoff of our med-tech businesses into a separate publicly traded company called CareFusion But even after that spin, Cardinal Health remains one of the largest health-care products and services companies in the world. Over roughly 30,000 employees are focused on making health care more cost effective so our customers, pharmacies, hospitals, physician's offices, surgery centers and long-term care facilities can focus on patient care.

     We see our role as the essential link in the health-care supply chain, helping to reduce costs, enhance efficiency and improve quality while providing pharmaceuticals and medical products to more than 40,000 customer sites each and every day. We're also the leading manufacturer of medical and surgical products. And we support the diagnostic industry while supplying medical products to clinical labs and operating the nation's largest network of radio pharmacies to aid in the early diagnosis and treatment of diseases.

     Given the breadth and depth of our products and services and the fact that we touch just about every provider of health care in the United States and Canada, we have an interesting vantage point to view and serve the health care system. In this position, we do so much more than just move products from point A to point B. There isn't a doctor, nurse or pharmacist in the world who chose a career in health care to track medication inventories, restock supply rooms or manage relationships with thousands of suppliers. That's our job. And as the business behind health care, our goal is to improve the cost effectiveness of the system so that our customers can run patient-centered organizations that improve the quality of care.

     So with that as background, let me get back to the topic at hand. Much of the health care debate has been about cutting payments and from whom. And whether or not there will be a public plan. This also gives rise to ideological posturing on issues as sizable as the role of government in our society. Among the din of all this rhetoric, we may be neglecting some important discussions, and that's what I hope to express today.

     Let me start with a view from the epicenter of the debate, Washington, D.C. As you all know, Congress has been very busy working on health-care reform legislation this summer and this fall, and it has been a very partisan debate. The five major committees with jurisdiction over health care have completed action on the reform proposals, and only one Republican voted for a bill coming out of these committees. Senator Olympia Snowe of Maine voted with the Democrats in the Senate Finance Committee. This was the great hope for bipartisanship. Only one Republican vote does not make this work a bipartisan success.

     Many believe that Chairman Baucus’ inability to achieve a bipartisan package in the Senate Finance Committee will likely result in a pretty partisan bill being enacted into law at the end of the year. This prognosis assumes no significant changes are made to the current bills being considered, which is still a bit of a wild card.

     On Monday, Senate Majority Leader Harry Reid announced at a press conference that the final Senate version of the health-care reform bill will include a public insurance option. However, the bill will also include an opt-out feature, which will allow states to refuse to carry the public option. If you think about that very long, it's hard to figure out how that's actually going to work. I mention this not to suggest that I support a public option, even though I am Canadian, but because the Democrats are likely to lose the lone Republican senator to vote for health-care legislation as a result of this opt-out option. Senator Olympia Snowe is likely to opt out because of the opt-out option.

     Given that it has taken more than 40 years to pass any comprehensive health-care reform legislation, I don't think anyone really believed that we'd get this all done in six months. Understandably, it will take the better part of the fall and maybe even next year to merge the House and Senate bills and then send a final package to the President.

2009 AHA Keynote Address

     So what will the final package look like? That's the trillion-dollar question for us all. Will there be a public plan, employer and individual mandates, large subsidies for the poor to purchase insurance, massive cuts to suppliers? These issues are at the heart of the debate, and many feel that the stakes are very high, because they are. It might also be argued –- and I will touch on this in a minute -– that there really are some other far-reaching issues that have been lost in all this debate, that are really necessary to tackle in order to change the trajectory of the cost curve.

     Despite the politics, the posturing and the fervor that goes around this issue, we are probably closer to a major change in health care reform than we've ever been before. As we all continue to watch the sausage being made in Washington, I do believe the President will be signing a health-care reform bill at the end or very close to the end of this year. I won't even try to predict its exact scope and content.

     Most Americans understand that parts of the system are badly broken, yet two issues loom large in their minds: One, most do have health care coverage, see the doctors they choose to see and feel the system is working reasonably well for them and their families. And two, at a time of continued financial crisis, the prospect of a major overhaul and the deficits that may come with that is alarming.

     A recent Kaiser study showed that from February to August of this year, the number of Americans that feel worse off or believe that they will be worse off because of health-care reform has increased from 11% to 31%. These are concerns and perceptions that could delay us in getting to the finish line.

     That all said, the final bill, if and when it comes, won't be perfect and it won't address every issue. Compromises will be made. Important issues will be left out. And yes, it is quite possible that everything won't work as envisioned. Particularly for those of us who work in health care, the final legislation is likely to be the beginning of the journey, not the end.

     Which brings me to the question, what might that final destination look like? Or rather, what should that final destination look like? Ideally, we'd arrive at a sustainable transparent patient-centric system that provides affordable coverage to all people and aligns payment with quality and outcomes emphasizing health, prevention and effectively managing chronic conditions. Getting to that destination will require actions that truly reduce costs, not shift them.

     We'll need to make sure that we are not just squeezing the balloon of spending growth at one end only to see it pop out somewhere else. Fundamentally, the journey is going to be about change. Change is never easy, and change of this significance, packed with this emotion, is especially difficult. To quote an old maxim, “People don't fear change, they fear loss.”

     Everyone, people, families, businesses, and politicians are afraid of what they may lose in this journey. Loss of choice. Loss of income. Loss of control. Loss of economy. Nevertheless, we need to expand our reform strategy beyond legislation and take a cold hard look at what we can impact in the system as providers, suppliers, employers and consumers of care. How can we accelerate the impact of reform?

     In addition to my professional experience in the industry, as I said earlier, I shall acknowledge that I bring my personal experiences and quite possibly my own biases to the discussion on health care, and I borrow liberally from the other thinkers in the field. While most of the ideas that I want to share with you now are not new, I do believe they need to be voiced more consistently. Some of these thoughts may elicit outright opposition from many of you in the room, but I will argue that if you are not at least thinking about these issues seriously, then we’re simply not thinking.

     First, we need to recognize that our future health-care workforce needs to built now, because it's not there. The predictions suggest that by 2020 we'll have a shortage of 40,000 family practice positions in this country. And the number of medical students choosing primary care as a career choice has declined 52% since 1997. Even more concerning, we are expected to have an unmet demand of over 1 million nurses by that time.

2009 AHA Keynote Address    

We need to begin thinking immediately to expand training programs and rethink certain aspects of medical education. Reform is needed in this space to promote the concept of high-value care practice, including training in ambulatory settings, team-based care and quality improvement tools in complex patient management.

     More can be done to reduce costs and improve the quality of patient satisfaction and the timeliness of care, including the integration of care from both a clinician and technology perspective. As an example, just to get practical, we should ask ourselves whether all care requires the intervention of a physician and work more aggressively to build new models using quality allied health professionals, like nurse practitioners. We could consider amending the scope of practice laws to allow for greater use of these professionals and modify payment structures accordingly.

     A recent (INAUDIBLE 0:29:35.1) study published in the Annals of Internal Medicine suggest that retail clinics at stores like CVS or Walgreen's are just as good at treating routine illnesses as physician's offices, emergency departments and urgent care clinics, and are much less costly.

     For comparable care, the fees charged by the walk-in clinics were 30% to 40% less than the physician's offices or urgent care centers and 80% of the cost of treatment in an emergency room. Now, whether this data is exactly right or not is not the point. The point is that we must consider alternatives to delivering care, including how care is coordinated, and how we compensate the providers of that care.

     Another example would be amending payment structures to compensate pharmacists for their clinical expertise and time in order to expand the use of medication therapy management and have pharmacists work directly with patients on therapy regimens. We might even consider, as some countries like the U.K. or Canada have done, going beyond a collaborative prescribing model to allow pharmacists in the community to prescribe a limited classes of drugs.

     Second, we need to emphasize personal responsibility in health. To me, one of the big elephants in the room is our apparent inability to address obesity in this country. And again this goes back to the question of health care versus health. According to the Centers for Disease Control, in 2008 only one state, Colorado, had a prevalence of obesity of less than 20%. Obesity significantly increases things such as, heart disease, high blood pressure, diabetes, and certain forms of cancer. The cost of treating obesity-related diseases has doubled over the past decade and the medical tab was estimate to be as high as $147 billion last year.

     We as individuals have the ability to greatly influence our own health through diet, exercise and adherence to clinical and drug regimens as needed. The system needs to develop information incentives to support individuals to make wise choices about their health care, and more transparency of both pricing and quality outcomes is needed to allow people to make informed choices about where they purchase their health care.

     And third, we need to continue to look to the private sector for new models in delivering health care. Many employers are working diligently over the past decade, to improve the quality of the health care they provide their employees while at the same time reducing their costs. There's much to be learned from many of these models.

     Even by conservative estimates, a dollar invested in these programs generally returns $2 to $4 over a relatively short period of time, before taking into account attendance and productivity gains. At Cardinal Health, we passionately believe that employers should not only offer health insurance, but prevention and wellness programs to their staff. A healthy work force, as you know, is a huge asset. And our employees sincerely appreciate our constructing a program to meet their needs and make prevention, wellness and chronic care management affordable and easy to access.

     We support annual wellness visits to a primary care physician every year at no expense to all the covered employees and their dependents. We recommend that immunizations and screenings for blood pressure, cholesterol, diabetes, select cancers, and osteoporosis are also covered at no cost. In addition, we promote healthy lifestyles through self-care guides, Web-based tools, health assessments and resulting coaching, smoking cessation and weight loss management classes. We've even revamped our cafeteria choices to make them healthier and our major office sites offer on-site fitness centers. Wherever possible, we include walking paths and fitness challenges to make exercise easier.

2009 AHA Keynote Address

     In addition to prevention and wellness, we offer chronic care management that is supported not only by formal disease management programs but by nurse advocates and care coordination as well. And next month we plan to open a clinic and on-site pharmacy at our headquarters buildings to provide easy access to medical professionals. These programs have proven to be very popular with our staff and families, and we continue to add new components based on feedback from our employees.

     Cardinal Health has also offered a consumer-directed health plan since 2003. It's a higher deductible plan compared with a health reimbursement account, or HRA, and within this program, prevention and wellness programs are still covered at 100% and the company contributes to the employee’s HRA. When this plan was first adopted in 2003, only 18% of our employees chose this option. Now we have 40% participation and growing. Our approach is paying off through healthier employees that are more productive, and there are savings as well. It is interesting as we benchmark our costs against comparable companies. In 2008 Cardinal Health's preventative benefit utilization increased by 6% and our overall costs per visit dropped by 3%.

     But besides the costs savings, this is the right thing to do both in the short term and the long term. It keeps employees healthier, decreases costs and helps us to avoid chronic diseases in the future. And the public sector needs to look at the success of private companies in these areas and mimic that success in the Medicare and Medicaid programs. Some of these (are included in varying degrees or through pilot programs in the health-care bills that Congress is considering. Although they may not have been the focal point of the debate up to now, they do provide important tools in the journey towards a sustainable system that is efficient, effective and patient centered.

     One final point I would like to make, and this applies very directly to the concept of the best practices that I know many of you are discussing today. I find it very interesting that when you look at all of the discussions about health-care reform over the past six to 12 months, there is actually very, very little discussion about adopting best practices from other countries. Amazingly little, when you think about it, and one of the reasons for that is anytime anyone mentions another country's health-care system the response is the dreaded two words “socialized medicine,” which tends to cut the debate short in about three seconds because that's a term that no one wants associated with them as a politician.

     I'm not saying, by the way, that the concept of socialized medicine is necessarily transferable to the U.S., or even that another nation's health-care system can be transferred to the U.S. We're a unique nation with unique needs and we are going to have to find our own way to complete this journey. But I find it hard to believe that after 50, 60, 70 years of experience in some of the most successful and wealthy countries in the world that there aren't things in best practices that we can adopt and bring to our country as we reform our own health care.

     As I mentioned, the amount of that discussion that's happening in the circles that matters is amazingly light, and I compare that to companies. If you were going to propose an idea to your boss and they said, “Have you looked at what other companies have done?”, and you said, “No, I don't think they’re relevant,” I think all of us would get laughed out of the room. But for some reason, we allow our politicians to make that same point and get away with it.

     In this regard, on Oct. 19 in The Wall Street Journal op-ed page, there was an interesting article, I think it was titled, “What Singapore Can Teach the White House About Health Care.” And it talks about the Singapore health-care system, which again, you know, is not transferable to the U.S. directly. It's a country of 3 million people on a tiny island versus 300 million-plus people in a large country. But some of the unique aspects of the Singapore health-care system are very interesting, particularly to those of us who believe in free choice and transparency of pricing.

     So in conclusion let me say, we at Cardinal Health continue to play an important role in helping health-care professionals manage their operations more effectively for the patients that they serve. I am hopeful that our government will support broad-based prevention, responsibility and delivery system reforms that move our health-care system in the right direction for us all. Health-care reform is truly critical to our country's economic future and to our national conscience, quite likely, and to many of our livelihoods as well.

2009 AHA Keynote Address

Questions and Answers:

     So with that, thank you for allowing me to share my thoughts today. I think we're going to leave a little bit of time for questions if you have any.

     Q: Jeff, good morning. Thanks for the interesting remarks. I come from the opposite end of the health-care spectrum. I'm with a Swiss medical research institution whose name I won't even try to pronounce because even I as a Schweizer Deutsch speaker have to stumble over it. In the last four years, since you've been at Cardinal, what have you done to make health care more accessible to, let's say, the bottom 10% or 20% paid of your workforce? Specifically, what percentage of them is covered now by your health plan versus four years ago?  And what percentage bite out of their pay check does health care, apples for apples, take now versus four years ago?

     Henderson: That's a good question. Virtually all of our employees are covered by our health-care programs in some form or fashion. We do offer different programs for different people. I find particularly the HRA program or the modified HRA program that I spoke about earlier has been very well accepted particularly by people in the organization who make less money because it's a flexible program that allows them to make decisions and choose health-care providers based on price and then manage their own spending as a result.

     We've been pretty effective at giving choice to our employees, letting them select the program that meets their needs and their spending requirements and their anticipation of medical expenses coming into any given year. In terms of percentage of compensation, that's a hard number; it obviously depends on the compensation. So an average number really isn't that relevant, you know, for a company where you've got people making a million-dollars-plus down to people who are making $30,000 to $40,000 a year. And quite honestly, for the people making $30,000 to $40,000 a year, it is a fairly significant part of their paycheck. I won't deny that. Our goal is to continue to find ways to make it a less significant part of their paycheck, while at the same time, reducing costs to the company.

     We've actually had a fair amount of success at that, and if we compare our total health-care costs to many other companies, we benchmark extraordinarily well. Part of that, I'll admittedly say, is due to the relative youth of our company and the youth of our employee base, just because we're only 30 years old as a company. But a lot of it is due to the focus on the prevention and wellness that we have incorporated into our programs and the fact that virtually all of our prevention and wellness programs are provided at no cost. People are taking advantage of that. So hopefully, that is making a difference.

Q:   I guess that's all.

     Henderson: Thank you for your time. Enjoy the rest of the conference and again, congratulations to the award winners.

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